PANGANAI REGGIS NGORIMA
Zimbabwe presently finds itself in the midst of economic throes reminiscent of the devastating woes of 2007 and 2008, a period that was dominated by hyperinflation, a vibrant black market fueled by shortages on the shelves of some locally produced basic commodities which government has been effectively subsidizing via provision of foreign currency at parity rate. The genesis of the current economic malaise has its roots in the ill-conceived introduction of the bond notes as a medium of exchange in November 2016 as well the ballooning domestic government debt. While the bond notes were said to be an export incentive aimed at boosting export competitiveness it has now become clear that the RBZ was not only untruthful but that this was in fact a hoax and the intended effect of the bond notes was to clandestinely prompt internal devaluation.
What is Internal Devaluation?
Internal devaluation is a macroeconomic strategy that is believed to boost international competitiveness of a country that has negative trade imbalance and an inflexible exchange rate regime owing to either being in a monetary union or using the currency of another country. The strategy entails the lowering of production costs chief among them being labour costs as well as increasing VAT on imported products. The aim being to make locally produced products cheaper than imports locally and on the international market. This strategy has been used mostly in Eurozone by Ireland, Spain, Germany and more recently Greece with varying degrees of success. It does not come without a huge economic and social cost.
What Brought This About?
The Reserve Bank of Zimbabwe Governor Dr. Mangudya was appointed to the position in 2014 following the lapse of Dr. Gideon Gono’s 2 term tenure. His rallying call in his first year of office and thereafter was Internal Devaluation. At the time Zimbabwe’s current account deficit stood at US$3 billion and was growing. In its paper titled “Assessing The Impact of The Real Effective Exchange On Competitiveness In Zimbabwe” authorized by the RBZ Economic Research Department and with reference RBZ Working Paper Series No. 1 -2015, the RBZ concluded that the Real Effective Exchange (“REER”) of the USD in Zimbabwe was overvalued by 45% as at 2014 and that this was one of the main reasons for Zimbabwe’s exports being uncompetitive on the international market. The RBZ proffered that internal devaluation and fiscal devaluation policies will need to be adopted to correct this situation and improve the countries international competitiveness.
However in the absence of flexible labour legislation and a flexible exchange rate regime, pursuing internal devaluation based on its strict definition would be next to impossible. The finance ministry’s halfhearted attempts at fiscal reforms were met with resistance from former President R.G Mugabe’s regime. As such both centerpieces of Mangudya’s 2015 Monetary Policy and Chinamasa’s Fiscal Policy were thrown out. This however did not stop the yawning gap on the current account and increasing pressure on liquidity. Zimbabwe was simply spending more US$ than it was generating.
Mangudya’s Stroke of Evil Genius
With mounting pressure on liquidity Dr. Mangudya then conceived the ill-fated Bond note with an announcement of their introduction coming in May 2016. Notwithstanding numerous protestations from banks, industry, civil society and the general populace, with memories of the 2008 still fresh in their minds, Dr. Mangudya proceeded to print the bond notes and released them into circulation in November 2016. His position was that the Bond notes were an export incentive that was guaranteed by an Afrexim Liquidity Support Facility. Dr. Mangudya claims that bond notes resulted in a 36 percent increase in forex earnings in 2017 and 37 percent in the first 10 months of 2018. He promised to resign should the bond notes fail.
Needless to say, the bond notes have been an absolute disaster and have resulted in resurgence of the black market, hyperinflation, product shortages and more importantly increased suffering of the masses. The announcement of the introduction of bond notes as well as the foreign payments priority lists on the 4th May 2016 triggered the parallel market for USD as it became increasingly difficult for importers to make their international payments via the banking system. This led to the emergence of the now vibrant parallel market for foreign currency and international payments at astronomical costs.
Price Tailspin
Since the May 2016 announcement of the imminent introduction of bond notes, prices have steadily increased and more recently have been galloping in a hyperinflationary fashion. The deflationary trend that had been recorded over the years was reversed from October 2016 and since then prices have continued to rise with an ever increasing pace. Whilst initially price increases had been restricted to imported products, from the second half of 2017 price changes were effected across the board. Importers in sectors like hardware retail increased their prices for payments done via RTGS or electronic payments whilst those paying in USD would get a discounted price.
The 2018 saw this trend spreading across all sectors. Whilst players in FMCG retail for example did not demand payment in USD their pricing reflected an increase equivalent to the unofficial exchange rate. What this shows is that some manufacturers and importers have maintained their USD prices but have indexed their RTGS invoiced products to the exchange rate. In effect Zimbabweans in real terms are paying USD prices whether as hard cash or equivalent of that USD denominated price. Pharmacies now only take USD for most prescribed medication. The medication that they do accept electronic payment for, the price has shot up by over 3 times from its price two months ago. The exchange rate of USD1:1BOND only exists in government circles, the privileged and to an extent fuel pricing and prices of the few subsidized products like cooking oil that have since literally vanished from supermarket shelves. This has created arbitrage and rent-seeking opportunities for some whilst causing untold suffering for the majority.
Salaries and Wages Stuck In Time Warp
Salaries and wages for the majority of working Zimbabweans have been devalued by the extent of the galloping unofficial exchange rate sending them into dire poverty. Zimbabweans were slowly regaining their confidence and had even started saving, but all this was eroded by the May 2016 Bond note announcement. Whilst government maintains that the Bond note and the RTGS balances have equivalent value to the USD, Zimbabweans are facing the reality of an exchange rate upward of 3.5 as of today, effectively meaning that an employee who was earning $400 now earns USD114 and a pensioner that was receiving $60 in now taking home USD17, well below the World Bank International Poverty line of USD1.90 a day per person. President E D Mnangagwa’s government needs to take urgent steps to address this desperate and catastrophic situation as the masses have been sent into abject purely living them barely able to afford a single meal a day and lifesaving medication.
The 1:1 Exchange Rate Charade
Acceptance of a problem and indeed reality is the first step to finding solution. The RBZ governor and minister of finance (who made a sensational somersault on his earlier position regards bond notes not being at par with USD) maintain that USD is at par with the Bond Note. The motivation for this is on one hand to avoid the instant economic pressure that will result from such a recognition of the stark reality. On the other hand government continues to collect forex generated by exporters at this imaginary 1:1 exchange rate. This goes to the heart of the recent shenanigans that were happening between the RBZ and the fuel industry players. The money that is being bought at 1:1 is being accessed by a select few and the official cover of fuel players. Already employees are pushing for cost of living adjustments to their salaries and wages in recognition of the value that they have lost due to devaluation of their incomes. Pensions, Savings and other investments that are not linked to the stock exchange are having their value wiped out every single day. How long this charade will be kept on we do not know.
Why the Government is Getting it wrong?
It is common cause that all Zimbabweans yearn for economic prosperity and to break from the misery of the past two and half years whose signature has been cash shortages as well as depressing loss of value on salaries, savings, pensions and general welfare.
The GoZ has not made any serious efforts towards building consensus around the path to its stated goal of improving the livelihoods of Zimbabweans. If anything all they are talking about is the pain the masses should carry, that in fact they have been bearing for the past 2 years. Bellowing about a vision 2030 is insensitive to the very real and present crisis the masses are having to deal with daily.
The minister of finance and indeed the President have not shown appreciation or urgency to the need to resolve the predicament of lost value. The GoZ needs to acknowledge that the masses have lost value in real terms and are 70% out of pocket compared to two years ago. Businesses have passed the burden of increased procurement and production costs to the consumer. The consumer’s income has remained stagnant and therefore has been subjected to value erosion. A dollar from 2016 is now effectively 30cents. In the absence of compensation for this lost value in the form of wages and salaries increases will result in depressed Aggregate Demand and this will effectively undermine efforts to resuscitate the ailing economy as the country is likely to fall into recession.
Quod erat demonstrandum, interval devaluation was forcefully achieved primarily via the introduction of bond notes and certainly those who covertly pushed for its implementation are high fiving each other. But at what and who’s cost? The masses today carry a burden they never consented to carry.
The government therefore needs to adopt a moral suasion strategy that leads to engagement with business, labour bodies and civil society in an honest manner that will result in a social contract that takes into account interests of all concerned parties and pushes the nation forward in unison. However treating the masses like illiterates and serfs with no rights will undermine the government’s efforts and will doom the programs it is pursuing to failure.
No government policy, regardless of how well-crafted and well-intended it is, will succeed without the buy in of all the key economic players in Zimbabwe that is Labour, Business and Government itself. If Government is honest about turning the fortunes of this once great nation, the raft of policies to be adopted regardless of the name they go by, be it internal devaluation, structural reforms or austerity measures will need government to earn the support of the masses and business via demonstrably genuine efforts in dealing with corruption, fiscal and monetary indiscipline. Less talk, more action.
Panganayi is an Independent Economic and Social Commentator, Retailer
